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Generic-drug industry tells 4th Circuit to let price-gouging ruling stand

Maryland seeks 4th Circuit's reversal of decision striking down law

Generic-drug makers and distributors have urged the full 4th U.S. Circuit Court of Appeals to let stand a three-judge panel’s decision last month striking down as unconstitutional Maryland’s law aimed at preventing unwarranted price increases by their industry.

The Association for Accessible Medicines’ filing Monday followed Maryland Attorney General Brian E. Frosh’s request the full circuit review the panel’s 2-1 ruling that the 2017 law directly regulates the price of transactions that occur outside the state, authority the Constitution’s Commerce Clause leaves to Congress and not to state legislatures.

In its 4th Circuit filing, AAM said the divided panel’s constitutional conclusion was correct, noting just one of the 20 largest generic drug makers and no national distributors operate in Maryland.

The law’s constitutional flaw “turns on the more fundamental principle that a state has no authority to regulate the terms of transactions that take place wholly out of state,” wrote Jay P. Lefkowitz, AAM’s lead attorney. Under the Constitution, “each state has a sovereignty that is not subject to unlawful intrusion by other states, and it would offend that sovereignty to declare unlawful conduct that takes place within another, even if that out-of-state conduct has in-state effects.”

Lefkowitz is with Kirkland & Ellis LLP in New York. He was joined on the brief by Jonathan D. Janow and Matthew D. Rowen of the law firm’s Washington office.

Frosh, in pressing for full 4th Circuit review, stated Maryland’s statutory attempt to prevent price gouging of state residents by the generic-drug industry is as constitutional as validated state laws governing antitrust, consumer-protection and public-health issues that arise out of state.

“The (Maryland) statute’s validity is, by itself, an issue of exceptional importance,” Frosh wrote in Maryland’s full-court request, filed last month. “Maryland seeks to protect its citizens from a well-documented pattern of unethical conduct that substantially burdens state-funded health insurance programs and disrupts access to essential medicines. This court’s decision will substantially affect how Maryland and other states may address the adverse effects of extraordinary increases in prices charged for life-saving and life-sustaining drugs.”

Assistant Attorneys General Joshua N. Auerbach and Leah J. Tulin joined Frosh on the brief.

The 4th Circuit did not say when it will respond to Frosh’s request for full-court consideration of the case, Association for Accessible Medicines v. Brian E. Frosh et al., No. 17-2166. The losing party in the 4th Circuit will likely seek review by the U.S. Supreme Court.

The law, which went into effect Oct. 1, prohibits a significant price increase of an essential off-patent or generic drug and gives the Maryland attorney general the power to order the manufacturer to explain the reasons behind a significant price boost as well as request a court order restraining or enjoining a violation.

Gov. Larry Hogan in June allowed the law to go into effect without his signature, citing his concerns about its constitutionality.

The association filed suit in July, challenging the law as unconstitutional. U.S. District Judge Marvin J. Garbis, who sits in Baltimore, dismissed the Commerce Clause challenge, prompting AAM to appeal.

The divided 4th Circuit panel found three factors pointing to the law’s violation of the Constitution’s clause.

“First, the act is not triggered by any conduct that takes place within Maryland,” Judge Stephanie D. Thacker wrote for the majority. “Second, even if it were, the act controls the prices of transactions that occur outside the state. Finally, the act, if similarly enacted by other states, would impose a significant burden on interstate commerce involving prescription drugs.”

For example, “if multiple states enacted this type of legislation, then a manufacturer may consummate a transaction in a state where the transaction is fully permissible, yet still be subject to an enforcement action in another state (such as Maryland) wholly unrelated to the transaction,” added Thacker, who was joined by Judge G. Steven Agee in the published decision.

Dissenting Judge James A. Wynn Jr. said the Maryland statute falls within the state’s “general police powers to regulate matters of legitimate local concern” without violating the Commerce Clause.

“Here, Maryland legitimately targeted generic drug pricing practices specifically designed to prey on the special vulnerabilities of a defenseless group of Maryland citizens,” Wynn wrote. “Simply put, the Maryland statute – which applies equally to in-state and out-of-state manufacturers and distributors – does not implicate the concerns that lie at the heart of the Supreme Court’s dormant (state-law generated) Commerce Clause jurisprudence: economic protectionism, discrimination against interstate commerce, and state regulation of streams of transactions that never cross through the state’s borders.”

Daily Record Legal Affairs Writer Heather Cobun contributed to this report.

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